Daily Stock Picks Newsletter from September 25th, 2008

Virtually nobody expected that the vote for the financial rescue package to not pass the Congress today so the sell-off in stock prices became the biggest point drop in history and the 17th biggest percentage drop at 7% on the Dow and 9.1% in the Nasdaq Composite.

AAPL, Apple Computer, was downgraded by two firms today which sent one of my favorite stocks down on the absolute worst day for a downgrade. This stock dropped about 18% today or almost 23 points.

GOLD, Rangold Resources, finished its correction for now and hit $38.50 from last week's high of $46.88 where the short signal triggered. This short sale stock pick from last week's report is now completed and should be closed. It was surprising to see spot gold prices decrease today because gold typically rises in price when uncertainty occurs but commodities were dropping across the board, taking gold with it.

Of the 107 stocks that I track on my watch list, only one stock was up at the close and it was up only 18 cents. Several ETF's (Exchange Traded Funds) that are short oriented were up.

Considering that the Congress and the regulators have to come back to the drawing board later this week, I would expect the market to open down and have a follow through to the downside tomorrow. Currently, the Asian markets opened down over 5% in the first few minutes and this worldwide sell-off may last for a few more days.

I think there is an enormous opportunity that is developing this week on the long side but it will be challenging technically and emotionally as to the timing of the purchases of stocks.

The primary indicator to follow as to the timing of your purchases should be the VIX, the CBOE Market Volatility Index. On Power Etrade Pro's platform, this symbol is $VIX but look up or ask your brokerage firm what the symbol is for their quote system. The symbol is often different for different quoting systems. Do not use a 20 min delayed quote for this.

The VIX closed at 46.72, which is the highest reading since October 22, 2002. Usually the peak VIX reading occurs in one day at one moment and rarely does the VIX just stay around the same level like a stock does. It is one quick fleeting moment and a reversal in this index shows a declining real-time chart on a 1 or 3 minute chart over a 2 day period (best settings).

The Thursday before last, on September 18, 2008, we hit a reading of 42.16 and 30 hours later, the VIX reading was 27.92. During that time, we saw a 1,000 point swing in the Dow Jones Industrial Average in 30 hours. We also saw extreme cases of some financial stocks go from $11.74 to over $36 on MS, Morgan Stanley and many stocks doubled during that time.

We are going to see the same thing happen on this next bottom but higher profit multiples are possible over a longer period of time than just 30 hours as we saw on the September 18-19th time frame.

If you are lucky enough to be able to watch CNBC-TV during the day (or unlucky if you have to listen to all the chatter), you can tell various news events that may affect stocks in this situation. Since the news events are changing so quickly, as they did last week with various banks, brokerage firms and an insurance company, any news related as to the timing of the vote, terms of the rescue proposal or any news of companies failing or stock prices in a freefall.

Keep on watch for new banks that may fail this week or how the delay of the voting of a proposal may affect other companies. You are also trying to keep a pulse on the sense of "panic" in both the CNBC staff giving the news as well as the guests they interview.

If you are cued into Fox Business news or Bloomberg TV more than CNBC, go with your station you are used to because you can sense the change in tone and coverage from day to day.

As I've said all week, pick out a group of highest quality stocks that are the most popular. Avoid the low priced stocks that go down below $5 from let's say, $15 because those are usually disaster stocks. They often don't come back and it is more reliable to stay with the large cap quality stocks. Make that list up immediately and choose from various sources.

Another indicator to be watching is the total volume in a particular stock relative to its previous several days of volume and normal volume. We want to see increasing volume while a stock drops faster and faster. Also take note of the total volume that is developing in the Dow and Nasdaq as reported by Bob Pisani on CNBC on the NYSE floor or the reporter at the NASDAQ.

This would be a great time to become diversified in your investment categories and I am looking for a combination of stocks from various categories such as financial, housing, technology, health care, a small amount of commodity, and possibly ETF's, exchange traded funds that represent sectors or various stock indices. I'm not convinced that the energy stocks will have as much of a bounce considering oil continues to drop based on a concept that is called "demand destruction" (less demand caused by the high cost that changed habits of consumers).

You always want your "go to list" under times of extreme sell-offs in stock markets such as we are witnessing today.

We really have a great opportunity the next 2 or 3 days to let the stock markets drop more and more while we wait to hear when a proposal will be made and ultimately accepted. The ideal moment to buy is when it feels like outright panic.

When buying under these conditions, buy small amounts and be gradual about it without getting overweighted in any one category or stock and avoid leverage.

Mitch King is the founder of TradeStocksAmerica.com. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Mitch King. Investment recommendations may change without notice and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Mitch King and/or the staff at TradeStocksAmerica.com may or may not have investments in any stocks cited above before or after this newsletter is prepared. Opinions expressed in these reports may change without prior notice.

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